Framework for Revival
and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)
1. Eligibility:
The provisions made
in this framework shall be applicable to MSMEs having loan limits up to Rs.25
crore, including accounts under consortium or multiple banking arrangement
(MBA).
2. Identification of
incipient stress
2.1 Identification by
banks or creditors – Before a loan account of a Micro, Small and Medium
Enterprise turns into a Non-Performing Asset (NPA), banks or creditors should
identify incipient stress in the account by creating three sub-categories under
the Special Mention Account (SMA) category as given in the Table below:
|
SMA Sub-categories
|
Basis for
classification
|
|
SMA-0
|
Principal or
interest payment not overdue for more than 30 days but account showing signs
of incipient stress (Please see Annex
- I)
|
|
SMA-1
|
Principal or
interest payment overdue between 31-60 days
|
|
SMA-2
|
Principal or
interest payment overdue between 61-90 days
|
On the basis of the
above early warning signals, the branch maintaining the account should consider
forwarding the stressed accounts with aggregate loan limits above Rs.10 lakh to
the Committee as referred in para 3.3 within five working days for a
suitable corrective action plan (CAP). Forwarding the account to the Committee
for CAP will be mandatory in cases of accounts reported as SMA-2.
2.2 As regards
accounts with aggregate loan limits up to Rs.10 lakh identified as SMA-2, the
account should be mandatorily examined for CAP by the branch itself under the
authority of the branch manager / such other official (hereinafter referred to
as ‘designated official’) as decided by the bank in terms of their Board
approved policy. Other terms and conditions, such as time limits,
procedures to be followed, etc., as applicable to the cases referred to the
Committee as referred in para 3.3, should be followed by the branch manager /
designated official. However, the cases, where the branch manager /
designated official has decided the option of recovery under CAP instead of
rectification or restructuring as mentioned in para 5.3 (a) or (b), should be
referred to the Committee for their concurrence. Banks, with the approval of
their Boards should frame a suitable policy in this regard as given in para
3.4. The branch manager / designated official should also examine the accounts
reported as SMA-0 and SMA-1, if it is deemed necessary.
2.3 Identification by
the Borrower Enterprise - Any MSME borrower may voluntarily initiate
proceedings under this Framework, if the enterprise reasonably apprehends
failure of its business or its inability or likely inability to pay debts or
there is erosion in the net worth due to accumulated losses to the extent of
50% of its net worth during the previous accounting year, by making an
application to the branch or directly to the Committee as referred in para 3.3,
wherever applicable.. When such a request is received by lender, the account
with aggregate loan limits above Rs.10 lakh should be referred to the
Committee. The Committee should convene its meeting at the earliest but
not later than five working days from the receipt of the application, to
examine the account for a suitable CAP. The accounts with aggregate loan limit
up to Rs.10 lakh may be dealt with by the branch manager / designated official
for a suitable CAP.
3. Committees for
Stressed Micro, Small and Medium Enterprises:
In order to enable
faster resolution of stress in an MSME account, every bank shall form
Committees for Stressed Micro, Small and Medium Enterprises as per the
following arrangements:
3.1 All banks
having exposure towards MSME sector shall constitute a Committee at each
District where they are present or at Division level or Regional Office level,
depending upon the number of MSME units financed in the region. These
Committees will be Standing Committees and will resolve the reported stress of
MSME accounts of the branches falling under their jurisdiction.
3.2 For MSME
borrowers having credit facilities under a consortium of banks or multiple
banking arrangement (MBA), the consortium leader, or the bank having the
largest exposure to the borrower under MBA, as the case may be, shall refer the
case to its Committee, if the account is reported as stressed either by the
borrower or any of the lenders under this Framework. This Committee will also
coordinate between the different lenders.
3.3 The
Composition of the Committee shall be as under:
(a) The regional or
zonal head of the convener bank, shall be the Chairperson of the Committee;
(b) Officer-in-charge
of the Micro, Small and Medium Enterprises Credit Department of the convener
bank at the regional or zonal office level, shall be the member and convener of
the Committee;
(c) One independent
external expert with expertise in Micro, Small and Medium Enterprises related
matters to be nominated by bank.
(d) One
representative from the concerned State Government. Endeavour should be made to
bring representative from the respective State Government in the Committee. In
case State Government does not nominate any member, then the convening bank
should proceed to include an independent expert in the Committee, namely a
retired executive of another bank of the rank of AGM and above.
(e) When handling
accounts under consortium or MBA, senior representatives of all banks / lenders
having exposure to the borrower.
3.4 Banks, with
the approval of their Boards, should frame a policy, based on these
instructions, on the composition of the Committee, the terms of appointment of
its members, the manner of filling vacancies, and the procedure to be followed
in the discharge of the Committee’s functions. While decisions of the Committee
will be by simple majority, the Chairperson shall have the casting vote, in
case of a tie. In case of accounts under consortium / MBA, lenders should sign
an Inter-Creditor Agreement (ICA) on the lines of Joint Lenders’ Forum (JLF)
Agreement. Banks may put in place suitable arrangements, including dedicated
manpower, to ensure smooth functioning of the Committee and adherence to the
stipulated timelines.
3.5 All eligible
stressed MSMEs shall have access to the Committee for resolving the stress in
these accounts in accordance with regulations prescribed in this Framework.
3.6 Provided
that where the Committee decides that recovery is to be made as part of the
CAP, the manner and method of recovery shall be in accordance with the existing
policies approved by the board of directors of the bank which has extended
credit facilities to the enterprise, subject to any regulations prescribed by
the Reserve Bank of India and extant statutory requirements.
4. Application to the
Committee for a Corrective Action Plan
4.1 Any lender
on identifying an MSME account as SMA-2 or suitable for consideration under the
Framework or on receipt of an application from the stressed enterprise, shall
forward the cases having aggregate loan limits above Rs.10 lakh to the
Committee for immediate convening of meeting and deciding on a CAP. Stressed
enterprises having aggregate loan limits above Rs.10 lakh can also directly
file an application for CAP to the Committee or to the largest lender for
onward submission under advice to all its lenders. The Indian Banks’
Association (IBA) may prescribe suitable application formats for aggregate loan
limits above Rs.10 lakh, for this purpose, which, inter-alia, should include
the following:
(a) Latest audited
accounts of the Enterprise including its Net worth;
(b) Details of all
liabilities of the enterprise, including the liabilities owed to the State or
Central Government and unsecured creditors, if any;
(c) Nature of stress
faced by the Enterprise; and
(d) Suggested
remedial actions
The Indian Banks’
Association (IBA) may also prescribe suitable formats for aggregate loan limits
up to Rs.10 lakh.
4.2 Where an
application is filed by a bank / lender and admitted by the Committee, the Committee
shall notify the concerned enterprise about such application within five
working days and require the enterprise to:
(a) respond to the
application or make a representation before the Committee; and
(b) disclose the
details of all its liabilities, including the liabilities owed to the State or
Central Government and unsecured creditors, if any, within fifteen working days
of receipt of such notice;
Provided that if the
enterprise does not respond within the above period, the Committee may proceed
ex-parte.
4.3 On receipt
of information relating to the liabilities of the enterprise, the Committee may
send notice to such statutory creditors as disclosed by the enterprise as it
may deem fit, informing them about the application under the Framework and permit
them to make a representation regarding their claims before the Committee
within fifteen working days of receipt of such notice. It is
mentioned here that these information are required for determining the total
liability of the Enterprise in order to arrive at a suitable CAP and not for
payments of the same by the lenders.
4.4 Within 30
days of convening its first meeting for a specific enterprise, the
Committee shall take a decision on the option to be adopted under the
corrective action plan as given in subsequent paragraphs and notify the
enterprise about such a decision, within five working days from the
date of such decision.
4.5 If the
corrective action plan decided by the Committee envisages restructuring of the
debt of the enterprise, the Committee shall conduct the detailed
Techno-Economic Viability (TEV) study (also refer para 5.1) and finalise the
terms of such a restructuring in accordance with the extant prudential norms
for restructuring, within 20 working days (for accounts having aggregate
exposure up to Rs.10 crore) and within 30 working days (for accounts
having aggregate exposure above Rs.10 crore and up to Rs.25 crore) and notify
the enterprise about such terms, within five working days.
4.6 Upon
finalisation of the terms of the corrective action plan, the implementation of
that plan shall be completed by the concerned bank within 30 days (if the CAP
is Rectification) and within 90 days (if the CAP is restructuring). In case
recovery is considered as CAP, the recovery measures should be initiated at the
earliest.
4.7 Where an
application has been admitted by the Committee in respect of an MSME, the
enterprise shall continue to perform contracts essential to its survival but
the Committee may impose such restrictions, as it may deem fit, for future
revival of the enterprise.
4.8 The
Committee shall make suitable provisions for payment of tax or any other
statutory dues in the corrective action plan and the enterprise shall take
necessary steps to submit such plan to the concerned taxation or statutory
authority and obtain approval of such payment plan.
5. Corrective Action
Plan by the Committee
5.1 The
Committee may explore various options to resolve the stress in the account. The
Committee shall not endeavour to encourage a particular resolution option and
may decide the CAP as per the specific requirements and position of each case.
While Techno-Economic viability of each account is to be decided by the
concerned lender/s before considering restructuring as CAPs, for accounts with
aggregate exposure of Rs.10 crore and above, the Committee should conduct a
detailed Techno-Economic Viability study before finalising the CAP.
5.2 During the
period of operation of CAP, the enterprise shall be allowed to avail both
secured and unsecured credit for its business operations as envisaged under the
terms of CAP.
5.3 The options
under CAP by the Committee may include:
(a) Rectification:–
Obtaining a commitment, specifying actions and timelines, from the borrower to
regularise the account so that the account comes out of Special Mention Account
status or does not slip into the Non-Performing Asset category and the
commitment should be supported with identifiable cash flows within the required
time period and without involving any loss or sacrifice on the part of the
existing lenders. The rectification process should primarily be borrower
driven. However, the Committee may also consider providing need based
additional finance to the borrower, if considered necessary, as part of the
rectification process. It should however be ensured that this need based
additional finance is intended only for meeting, in exceptional cases,
unavoidable increased working capital requirement. In all cases of additional
finance for working capital, any diversion of funds will render the account as
NPA. Further, such additional finance should ordinarily be an ad-hoc facility
to be repaid or regularised within a maximum period of six months. Additional
finance for any other purpose, as also any roll-over of existing facilities, or
funding not in compliance with the above conditions, will tantamount to
restructuring. Further, repeated rectification with funding, within the space
of one year, will be treated as a restructuring and no additional finance
should be sanctioned under CAP, in cases where the account has been reported as
fraud by any lender.
(b) Restructuring:–
Consider the possibility of restructuring the account, if it is prima facie
viable and the borrower is not a wilful defaulter, i.e., there is no diversion
of funds, fraud or malfeasance, etc. Commitment from promoters for extending
their personal guarantee along with their net worth statement supported by
copies of legal titles to assets may be obtained along with a declaration that
they would not undertake any transaction that would alienate assets without the
permission of the Committee. Any deviation from the commitment by the borrowers
affecting the security or recoverability of the loan may be treated as a valid
factor for initiating recovery process. The lenders in the Committee may sign
an Inter-Creditor Agreement and also require the borrower to sign the
Debtor-Creditor Agreement which would provide the legal basis for any
restructuring process. The IBA may prepare formats for this purpose on the
lines of formats used by the Corporate Debt Restructuring mechanism for
Inter-Creditor Agreement and Debtor-Creditor Agreement. Further, a stand-still
clause (as defined in extant guidelines on Restructuring of Advances) may be
stipulated in the Debtor-Creditor Agreement to enable a smooth process of
restructuring. The stand-still clause does not mean that the borrower is
precluded from making payments to the lenders. The Inter-Creditor Agreement may
also stipulate that both secured and unsecured creditors need to agree to the
final resolution.
(c) Recovery:– Once the
first two options at (a) and (b) above are seen as not feasible, due recovery
process may be resorted to. The Committee may decide the best recovery process
to be followed, among the various legal and other recovery options available,
with a view to optimizing the efforts and results.
6. The decisions
agreed upon by a majority of the creditors (75% by value and 50% by number) in
the Committee would be considered as the basis for proceeding with the
restructuring of the account, and will be binding on all lenders under the
terms of the Inter-Creditor Agreement. If the Committee decides to proceed with
recovery, the minimum criteria for binding decision, if any, under any relevant
laws or Acts shall be applicable.
7. Time-lines
Detailed time-lines
are given for carrying out various activities under the Framework. If the
Committee is not able to decide on CAP and restructuring package due to
non-availability of information on statutory dues of the borrower, the
Committee may take additional time not exceeding 30 days for deciding CAP and
preparing the restructuring package. However, they should not wait beyond this
period and proceed with CAP.
8. Additional Finance
8.1 If the
Committee decides that the enterprise requires financial resources to
restructure or revive, it may draw up a plan for provision of such finance. Any
additional finance should be matched by contribution by the promoters in
appropriate proportion, and this should not be less than the proportion at the
time of original sanction of loans. Additional funding provided under restructuring
/ rectification as part of the CAP will have priority in repayment over
repayment of existing debts. Therefore, instalments of the additional funding
which fall due for repayment will have priority over the repayment obligations
of the existing debt.
8.2 If the
existing promoters are not in a position to bring in additional funds the
Committee may allow the enterprise to raise secured or unsecured loans.
8.3 Provided
further, that the Committee may, with the consent of all creditors recognized,
provide such loans higher priority than any existing debt.
9. If the
Committee decides on options of either ‘Rectification’ or ‘Restructuring’, but
the account fails to perform as per the agreed terms under these options, the
Committee shall initiate recovery under option 5.3(c).
10. Restructuring by
the Committee
10.1 Eligibility
(a) Restructuring
cases shall be taken up by the Committee only in respect of assets reported as
Standard, Special Mention Account or Sub-Standard by one or more lenders of the
Committee.
(b) However, the
Committee may consider restructuring of the debt, where the account is doubtful
with one or two lender/s but it is Standard or Sub-Standard in the books of
majority of other lenders (by value).
(c) Wilful defaulters
shall not be eligible for restructuring. However, the Committee may review the
reasons for classification of the borrower as a wilful defaulter and satisfy
itself that the borrower is in a position to rectify the wilful default. The
decision to restructure such cases shall have the approval of the Board of
concerned bank within the Committee who has classified the borrower as wilful
defaulter.
(d) Cases of Frauds
and Malfeasance remain ineligible for restructuring. However, in cases of fraud
/ malfeasance where the existing promoters are replaced by new promoters and
the borrower company is totally delinked from such erstwhile promoters /
management, banks and the Committee may take a view on restructuring of such
accounts based on their viability, without prejudice to the continuance of
criminal action against the erstwhile promoters / management. Further, such
accounts may also be eligible for asset classification benefits available on
refinancing after change in ownership, if such change in ownership is carried
out under guidelines contained in circular DBR.BP.BC.No.41/21.04.048/2015-16 dated September 24,
2015 on “Prudential Norms on Change in Ownership of Borrowing Entities
(Outside Strategic Debt Restructuring Scheme)”. Each bank may formulate its
policy and requirements as approved by the Board, on restructuring of such
assets.
10.2. Viability
(a) The viability of
the account shall be determined by the Committee based on acceptable viability
benchmarks determined by them.
(b) The parameters
may, inter-alia, include the Debt Equity Ratio, Debt Service Coverage Ratio,
Liquidity or Current Ratio, etc.
10.3. Conditions
relating to Restructuring under the Framework
(1) Under this
Framework, the restructuring package shall stipulate the timeline during which
certain viability milestones such as improvement in certain financial ratios
after a period of 6 months may be achieved.
(2) The
Committee shall periodically review the account for achievement /
non-achievement of milestones and shall consider initiating suitable measures
including recovery measures as deemed appropriate.
(3) Any
restructuring under this Framework shall be completed within the specified time
periods.
(4) The
Committee shall optimally utilize the specified time periods so that the
aggregate time limit is not breached under any mode of restructuring.
(5) If the
Committee takes a shorter time for an activity as against the prescribed limit,
then it can have the discretion to utilize the saved time for other activities
provided the aggregate time limit is not breached.
(6) The general
principle of restructuring shall be that the stakeholders bear the first loss
of the enterprise rather than the lenders. In the case of a company, the
Committee may consider the following options, when a loan is restructured:
(a) Possibility of
transferring equity of the company by promoters to the lenders to compensate
for their sacrifices;
(b) Promoters
infusing more equity into their companies;
(c) Transfer of the
promoters’ holdings to a security trustee or an escrow arrangement till
turnaround of enterprise to enable a change in management control, if lenders
favour it.
(7) In case a
borrower has undertaken diversification or expansion of the activities which
has resulted in the stress on the core-business of the group, a clause for sale
of non-core assets or other assets may be stipulated as a condition for
restructuring the account, if under the Techno-Economic Viability study, the
account is likely to become viable on hiving off of non-core activities and
other assets.
(8) For
restructuring of dues in respect of listed companies, lenders may be,
ab-initio, compensated for their loss or sacrifice (diminution in fair value of
account in net present value terms) by way of issuance of equities of the
company upfront, subject to the extant regulations and statutory requirements.
(9) If the
lenders’ sacrifice is not fully compensated by way of issuance of equities, the
right of recompense clause may be incorporated to the extent of shortfall.
(10) In order to
distinguish the differential security interest available to secured lenders, partially
secured lenders and unsecured lenders, the Committee may consider various
options, such as:
(a) prior agreement
in the Inter-Creditor Agreement among the above classes of lenders regarding
repayments;
(b) a structured
agreement stipulating priority of secured creditors;
(c) appropriation of
repayment proceeds among secured, partially secured and unsecured lenders in
certain pre-agreed proportion.
(11) The
Committee shall, on request by the enterprise or any creditor recognised under
paragraph 4.3, provide information relating to the proceeding as requested by
the enterprise or such creditor.
10.4 Prudential Norms
on Asset Classification and Provisioning
The extant asset
classification and provisioning norms will be applicable for restructuring of accounts
under this Framework.
11. Review
(1) In case the
Committee decides that recovery action is to be initiated against an
enterprise, such enterprise may request for a review of the decision by the
Committee within a period of ten working days from the date of
receipt of the decision of the Committee.
(2) The request for
review shall be on the following grounds:
(a) a mistake or
error apparent on the face of the record; or
(b) discovery of new
and relevant fact or information which could not be produced before the
Committee earlier despite the exercise of due diligence by the enterprise.
(3) A review
application shall be decided by the Committee within a period of thirty
days from the date of filing and if as a consequence of such review, the
Committee decides to pursue a fresh corrective action plan, it may do so.
